Current Thrift Savings Plan Allocation and Business Cycle Analysis – March 2016



best tsp fundSo after all the Sturm und Drang of the first two and a half months of 2016, we are back to zero. The market (which I typically measure in broad strokes with the S&P 500), was down by as much as 11% year-to-date on February 11th. But five weeks later – and after a stellar rally – it is now back to break-even for the year.

There are a few things responsible for that – solid economic numbers, a rebound in oil prices, and some soothing words from the Federal Reserve.

The economic numbers I will discuss in probably more detail than you want below (but you have to put up with it since that is the very purpose of this monthly update). The nutshell, however, is that the economic recovery is continuing to trundle along, and may even be showing some signs of strengthening. That signal is coming in the area of inflation – last week’s Consumer Price Index (CPI) core numbers (which exclude gas and food prices which can be very volatile for reasons unrelated to the economy) were up 0.3%. Why is that exciting? Because that number coupled with January number made up the strongest two month period in the last decade.  And a little bit of inflation is good (and make no mistake, this is just a little bit of inflation). Inflation means that companies can raise prices a little bit. Which means that they can raise wages a little bit (and they will probably be forced to as the labor market continues to slowly strengthen). Higher wages mean more money to buy stuff which means higher corporate earnings. And of course stock prices are entirely based on corporate earnings over the long term, so higher earnings mean higher stock prices which is what we want.

Oil has rebounded substantially – up 50% in the last month – although where it goes from here is anybody’s guess. If you are a big nerd like me, you may remember last Spring when oil gapped back up over $70, only to fall below $30 before the end of the year. I am not an oil analyst by any stretch, but my suspicion is that there will have to be more pain before enough US oil production goes offline for long enough for prices to find traction at this level.

And finally, the Federal Reserve met last week and didn’t do anything (like raise or lower interest rates). Which was what we expected. What we didn’t expect was for them to say: “What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path.” That is Fed-speak for “We think the economy is fine, but we have belatedly realized that if we raise rates as aggressively as we kept saying we were going to, we are going to blow the entire thing up.” That means no Fed interest rate hikes in the near term, and I would guess perhaps a 50% chance that we will see another one at all before the end of this year. (Unless the inflation we talked about earlier starts to really accelerate, in which case we could potentially see them start to tighten again.)

Why is that important to us? Because money goes where it is wanted. And if you can earn 1/3 of a penny on the dollar annually in bonds, investors know their money isn’t wanted there and they are going to put it into stocks. And so I am sticking with my somewhat overly confident and simplistic line from last month: “If you can do arithmetic, you are putting your money into stocks.

TSP performance year-to-date: (through market close on 02/22/2016)

Year to date Thrift Savings Plan fund performance:
• TSP C Fund:  0.85%
• TSP S Fund:  -1.90%
• TSP I Fund:   -2.33%
• TSP G Fund:  0.44%
• TSP F Fund:   2.29%

And the TSP LifeCycle Funds are very average for 2016 so far (just as they are engineered to be), ranging from -0.31% to 0.44%.

Last Month’s Economic Numbers:

In this section I will discuss the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance. (These indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle.)

Employment numbers: the unemployment rate in the United States remained at 4.9 percent in February, while total non-farm payroll employment increased by 242,000. I obtain this data from the Bureau of Labor Statistics.

Unemployment rate TSP 0316

Purchasing Managers’ Index (PMI): as usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates growth in manufacturing, and this month’s reading of 49.5 is below that range, but above the 43.2 which indicates an expansion of the overall economy. This marked the second straight month of improvement in the PMI after six months of declines, and a sharply higher figure than last month’s 48.2:

Manufacturing contracted in February as the PMI registered 49.5 percent, an increase of 1.3 percentage points from the January reading of 48.2 percent, indicating contraction in manufacturing for the fifth consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February PMI indicates growth for the 81st consecutive month in the overall economy, while indicating contraction in the manufacturing sector.

The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (48.9 percent) corresponds to a 1.8 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for February (49.5 percent) is annualized, it corresponds to a 2 percent increase in real GDP annually.

And here’s a snapshot of the last 12 months:

PMI TSP 0316


Yield spreads: The yield curve flattened in February (which just means that the difference in interest rates between short term and long term bonds is not a great as it was before). Based on yield spreads, the Cleveland Fed says:

Using the yield curve to predict whether or not the economy will be in a recession in the future, we estimate the expected chance of the economy being in a recession next February at 8.82 percent, up from January’s as 6.19 percent and nearly double December’s 4.42 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

The shaded areas in the chart below are actual recessions:

Yield Curve TSP 0316


Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) increased from January to February. The growth rate is what is meaningful here, and you can see that rate slowed a bit in the chart below:

Money Supply M2 in the United States increased to 12472.80 USD Billion in February from 12418.30 USD Billion in January of 2016.

Money Supply TSP 0316


All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am continuing to transition the bulk of my investments to the C Fund, which has been the best TSP fund of 2016 (while maintaining my position in the I Fund). I also believe that the probability of the US economy entering a recession in the next year is low.

Don’t forget the TSP I Fund

I don’t do a full breakdown in this space, but I watch the indicators for Japan, the UK, Germany, France and Switzerland (which comprise the bulk of the TSP I Fund) in an attempt to divine the direction that index will go over the medium and long term. The I Fund was tracking along nearly in lock-step with the TSP C and S funds over the last month until the European markets fell following yesterday’s attack in Brussels which created a little separation.

Continued Transition to the TSP C Fund

I see no reason not to continue moving most of the remainder of my Thrift Savings Plan investments to the C Fund to reflect where I believe we are in the Business Cycle. As soon as I hit publish on this post, I will be heading to to conduct an inter-fund transfer and to change my allocation to 75% C Fund, 10% S Fund, 15% I Fund.

And next month I still plan to complete the transition as follows:

  • April: 85% C Fund, 15% I Fund

I always try to remind readers that this is just what I am doing based on my circumstances, and isn’t a recipe for what anyone else should do with their Thrift Savings Plan. This is just food for thought, not something to mirror unless you have done your own research and considered your own circumstances.

Recommended Reading

Devils financial dictionaryThis month’s recommended book is a new one by Jason Zweig, The Devil’s Financial Dictionary. Zweig is an investing and personal finance columnist for The Wall Street Journal. In this book, he presents the principles of finance in a very amusing way, leveling his sharp wit at the myths and gibberish which Wall Street tries to hide behind. Not a primer on investing, but for investors who already know something about the financial world it is both very entertaining and educational. 


The Next Update

Unless something unexpected happens, I will send out my next update about this time next month. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military a few times a week at: @TSPallocation

What’s in it for me?

This guy and your thrift savings planI don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment (although if you really want to, you can donate to support the site here). You share by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!

18 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – March 2016”

  1. This is great info. However, if I’m not supposed to “mirror” what you’re doing why even give your allocation percentages?

    1. It would be very difficult to try to write about how I am executing my investing strategy without sharing my allocations. But I do want for what I’m doing to just be a conversation starter or food for thought – not the sole source for anyone’s decisions.

      1. I understand. The other TSP site I follow is totally opposite of what yours says. I don’t disagree that using a single source as the basis for investment decisions isn’t a good idea. I just wish the was more agreement on the strategies as it pertains to the TSP animal.

      2. TS Paul,

        I understand the admonition to not blindly follow you allocations; however, I take that for what it is (i.e. covering you back if someone follows your allocations and then gets the heck beat out of their TSP) That being said, I find your analysis easy to understand and extremely cogent for not investment gurus like myself. Therefore, I try to do the same analysis myself and verify it with you posts. I have followed your allocations since mid-January and have not yet been led wrong.

        Keep it up.


  2. Thank you for all your knowledge. I really like your patience when it comes to the TSP and it has been paying off for me since I began following you a few years ago. A lot of my colleagues panic when they see the market dip but you give me a lot of reassurance. I just want to say thank you for all your insight.

  3. How can you say the C fund has been the best fund this year when the F fund is over 2% and C fund is now under since close yesterday, i dont understand where you’re coming from.

    1. Sorry that wasn’t clear – I meant the best of the TSP stock funds, which are the only funds I would consider in this economic environment. That was really just sort of a toss-off line because one TSP fund out performing another over a period as short as 2.5 months really doesn’t mean anything.

      1. You are very right Mr. Paul… your analyses and discussions are very timely and fruitful… before investing money from my TSP account, I am following your blogs and posts for last few months. I did not have any prior idea about money market and I did not want to risk my TSP fund without understanding it. Your writing, discussions and references you provide here are useful to correlate each factors for your assumptions about investment. Your logic make sense and it seems to great even at this volatile market situation. I really appreciate these discussion as well as your allocation citation. This is very much helping and useful for many of us and I am really grateful to you for your valuable discussion and time. Thanks.

    1. Definitely not hurting. There have been a few articles out there lately making that case, and buybacks definitely helped limit some of the losses we might otherwise have seen. But I don’t believe buybacks are the exclusive reason the market is where we find it now.

  4. Paul, you publish your analysis about the 20th of each month. You end by stating, “after I hit publish I am making the following changes” then you follow with ….. “And next month I still plan to complete the transition as follows:” Do you make the next month change on the 1st of the month, or do you re assess and make that change around the 20th of the month after you publish next month’s analysis. I am reading March report, published 22nd March on 31 March. Tomorrow is 1 April, do you recommend I follow your March allocation? Or planned April allocation?? Love this site by the way!

    1. Thanks very much for your kind words. I always post before I make a TSP allocation change, and the next change should be right after my next monthly update. (Most of the time those changes in my TSP funds aren’t monthly the way they are right now while I am transitioning between the S Fund and the C Fund – they are more typically many months or even years apart.)

  5. TS Paul, when you say that you change your Thrift Savings Plan interfunds and allocations, I’m assuming you are changing the percentages for both? Not just for contributions? Thank you for clarifying this. -John

  6. TS Paul, I know the you change your allocations and contributions to the same percentages. My questions is, ” since I still have 30 years to work before retiring, would it be best to change my contributions to the funds that would not be doing so great to assist in the dollar cost averaging, or should I try to purchase the funds that we feel should be performing well? I guess I want the bulk of my money doing well while the biweekly contributions I would want to buy in cheaply. Having my cake and ice cream. Lol!!

    1. That’s an interesting idea, but I’m inclined to stick with plugging my money into the TSP fund which I think will do best. To buy low, I need to learn to front-run the change in the business cycle instead of waiting until it is blindingly obvious.

  7. Thank you! I followed what you suggested for March and gained back all I had lost, around $8,000.00 Doesn’t sound like much but to me it was. I somehow missed out on changing for April, so wondering what you suggest now for May? I will be retiring in about a year, so being risky is scary, but it has paid off.

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